The Power of the Cash Flow Focus Report

Do you feel like you have the cash flow of your business under control?

I asked that question of small business owners when I wrote the book Never Run Out of Cash. What percentage of them would you think said no? It was 82%. Puts you in pretty good company doesn’t it!

There are four reasons cash flow is so confusing to business owners:

Profit or loss is not cash flow – this is the single biggest source of confusion.

No clear definition of cash flow – most everyone understands profit or loss because it is one number you can see on a P&L. But cash flow is not quite that simple. It’s not a single number.

An increase in cash is not always good… and a decrease is not always bad – If cash was down one month because you decided to pay down debt that would be a good thing. If you increased your cash one month because you didn’t pay your vendors that would be a bad thing.

Accountant speak (and financial statements) – the last issue is as accountants we have done a poor job of making cash flow, and financial statements in general, easier to understand.

I will go into more detail about each of these four reasons in a future post. For now, I want to show you the solution to your confusion about cash flow. And how to understand your cash flow in just 10 minutes a month.

Can You Explain What Happened to Your Cash Last Month?

The graph below highlights the challenge and the opportunity all mixed into one. This is an actual small business. They had a profit one month of $15,831 but had less cash as a result.

This same thing is going on every month in your business. Write yourself a note real quick to grab your P&L and balance sheets. Pick any month you want and write down the profit or loss for the month. Then write down how much your total cash balance either went up or down from the previous month. Those two numbers will never be the same.

Here’s the important question. Can you explain what happened to your cash in a 2-minute conversation? Either to yourself, your banker, a lender, a partner, or an investor?

The Cash Flow Focus Report

I created the Cash Flow Focus Report to be a simple, common sense approach to understanding your cash flow that only takes 10 minutes a month. It brings focus to your cash flow, simplifies life, and leads to an understanding and sense of confidence that you will find freeing.

Very few business owners can look at a full blown Statement of Cash Flows and understand any portion of it. The Focus Report is specifically designed to solve that problem.

The report (shown in the image above) provides the answer to the question: what happened to the cash last month? Here is how the schedule works.

What happened to the cash last month?

The Cash Flow Focus Report helps you “focus” on only the three biggest drivers/changes/influences in your cash for last month.

While the Statement of Cash Flow you print from QuickBooks may have 20 or more lines of numbers, you are only going to put the three biggest changes in your cash on here. You then write a one-line explanation of each change. Then you conclude whether each change is good or bad. (You’ll be surprised what you learn when you think about whether a specific change in cash is good or bad.)

The report provides you the answer to what happened to your cash last month. In this example, the question is “how did we make about $16k but have less cash as a result”? The answer is “we had a number of large orders shipped to customers that had 30 day terms to pay. Our profit reflected the sales but we won’t receive the cash until next month. Plus we had some vendor invoices entered during the month that we will not pay until next month”.

The Obstacle

In my next post I will set out the step-by-step process for completing the Cash Flow Focus Report. I will also talk about how to overcome the primary obstacle: writing the one-line explanation for each change and deciding whether each change is good or bad.

(There’s a reason most people don’t understand how their cash flow works… and there is a way around that as well. I’ll show you how in my next post.)